Policy induced price volatility transmission: Linking the US crude oil, corn and plastics markets

Policy changes and the evolution of green technology have induced new linkages in commodity markets. In this research, we study a representative market system, the U.S. crude oil, corn and plastics markets affected by policies promoting corn-based energy and corn-based bioplastics production. A vector error correction model (VECM) is estimated to study price transmission among markets in the United States, especially price volatility spillover effects. We find that plastics prices and corn futures prices move together in the long run, but that the crude oil futures prices are weakly exogenous to this system. We identify significant bidirectional volatility transmission between the corn futures and plastics markets, which brings new challenges to stakeholders in both markets. Moreover, we demonstrate that EISA 2007 has strengthened linkages between the corn futures and crude oil futures markets. In addition, changes in the linkages across the three markets are associated with the fuel ethanol-gasoline consumption ratio. The potential application of these findings for policy makers and risk managers is discussed. (C) 2015 Elsevier B.V. All rights reserved.